The Net Promoter System measures how consistently brands turn customers into advocates – and it is considered the predominant customer success framework. As its popularity grew, NPS started to be misused in ways that undermined its credibility, as unaudited, self-reported Net Promoter Scores reduced the usefulness of the tool.
NPS founder Fred Reichheld has now introduced a hard metric based on accounting results known as “earned growth rate”. It captures the revenue growth generated by returning customers and their referrals.
In this podcast episode Brad Giles and Kevin Lawrence discuss:
- The problem with the Net Promoter System
- How NPS 3.0 works
- How to calculate your Earned Growth Rate
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Please note that this episode was transcribed using an AI application and may not be 100% grammatically correct – but it will still allow you to scan the episode for key content.
Kevin Lawrence 00:12
Hey, welcome to the Growth Whisperers podcast where everything we talk about is about building enduring great companies. I’m Kevin Lawrence joined as always with my co pilot down in Australia, Brad Giles. How’s it going?
Brad Giles 00:25
Excellent. Thank you. You’re doing very well today. How are you, Kevin?
Kevin Lawrence 00:29
Things are good. So what do we got for our topic today? What are we digging into?
Brad Giles 00:39
Today, we are talking about a fascinating article that we read that we came across, in from the Harvard Business Review. And it’s about a system that we both have used and advocated for many years called Net Promoter system, or NPS. And the founder of that concept is a guy called Fred Reichheld who wrote a book called The ultimate question, I think, was 2.0. Correct. And that book? Well, we’ve used it with a lot of clients. So today, we’re talking about an article that he’s written, which is the next iteration of net promoter score, and looking at customer advocacy in a different way.
Kevin Lawrence 01:27
Yeah, and shockingly, it’s NPS 3.0. It’s an awesome system. Absolutely love it. Excited to dig into it today. Because this article provided a big epiphany for me as my clients, many of them use it religiously and relentlessly. So, word of the day, Brad, what do you got?
Brad Giles 01:48
Shared I, I guess I’ve got a word or two words called Memento Mori, which is one day, my friend we will pass away. And so we need to live while we live. Just my own personal reasons for that, that I probably won’t dig into. But you know what, like, we’re not here for a long time, we’re to enjoy and make the most of the time that we hear and what about you, Kev?
Kevin Lawrence 02:13
Our school of hard knocks. I continue to learn through that. I think it’s actually the best teacher had a great experience. Just recently at the racetrack, we’re trying too hard, too fast. And a little Oopsie. And thankfully, it’s metal and fiberglass that can be fixed and not, you know, human beings, but it’s the school of hard knocks. It’s good for you. It’s humbling. It’s an equalizer. It teaches us quickly. And you know, I’ve got this rule of thumb that if I don’t make a couple of big mistakes every month, I’m not pushing hard enough. And, you know, normally I hit my quota. So I’m on track this month. So school of hard knocks and ..
Brad Giles 02:57
Momentum Mori, it’s stoic statement, it says you will die. So you must live while you’re alive.
Kevin Lawrence 03:05
Yep. And I gotta say, I’ve got some amazing friends, including yourself and others that I get to see in person regularly, that all believe that life is short. Let’s do great work, create a great impact on those around us and have a great time, which I’m really looking forward to doing this coming weekend with a bunch of friends. All right, well, let’s jump into the show. Net Promoter system, nps 3.0 What a great freakin article. And you know, I’ll review the system. And maybe you can review an overview, the first part, maybe the second word, your bad. But basically, it’s called the Net Promoter system. It’s a system for measuring customer engagement, same for employees. And it’s through the window of how likely they are to refer you to a friend or colleague. And it’s just a proxy for whether they’re out there with positive word of mouth, negative word of mouth, or they don’t even mention you, you’re free, credible, or, you know, they’re just they this they really couldn’t care less, again, for customers, our employees. So it’s a proxy for word of mouth, which we know it can be an incredible force in any business.
Brad Giles 04:16
Yeah. And some people have mistakenly called NPS Net Promoter Score. so delighted that you called it the system, isn’t it? Is it is a system not just a score? We’ve all probably answered the question in a form in a feedback form that says, how likely would you be to recommend our company to a friend or relative or a colleague, and it’s just ideally, it’s just one simple question with perhaps a free text box to write any comments. And then what we do is we take the numbers or the ratings from one to six, and they’re what’s called detractors. We take the people who write a nine or a 10 In, they’re called promoters. And then the people who are a seven or eight, they’re people who are there. What’s the word? Kevin?
Kevin Lawrence 05:09
They’re passives. And they don’t really they don’t count in the mathematics of it all, because they don’t do nothing. Yeah. They’re not unhappy.
Brad Giles 05:15
Yeah, so they’re passive. And so we don’t count those. So then we subtract the detractors from the promoters. And that gives us a score from positive 100, through to minus 100, potentially. So that’s why you could have a NPS of minus 40, or plus 16.
Kevin Lawrence 05:38
Yes, it shows generally, is the population of your customers, you know, the people that respond or a proxy for all are they generally out there super engaged or not. So for example, you know, in companies, you know, you ideally want all of your employees being promoters and the net, the happy ones from the really unhappy ones, you know, ideally, in a great company, we’ve got a 30% is kind of a minimum score, that we’d see an organization that we’d be okay with, when you get north of 50, you know, things are going well. And you know, and often when we look at the senior leadership team, you know, that score should be, you know, 7080 90 100, the senior people, they shouldn’t be the most engaged if the company is paying more. So it’s a proxy. And, and so the system is amazing, we use it so many different companies. And I share with Brad and appreciate that, you know, I got a great chance to work with Bain, who that’s where for Rachel was from, with one of our clients did deep work with them for a number of years to bring it to life in a large organization. And it’s just, it’s an amazing methodology. And the best part is, the numbers are interesting. But the comments are the guide to where the good stuff is happening, or the friction is happening, even Brad, in all of the clients we work with. We do a version of the NPS ratings for the employees that are participating, and a handful of other questions every quarterly meeting, to get a pulse on what’s actually going on in a company just so we get another deeper source of data on the employee engagement. Of course, we want to know what’s an annuity. So it’s an awesome system. And it’s very powerful, because it’s meant to be ongoing customer feedback. And there was a big freakin problem with it.
Brad Giles 07:20
Big Yeah there is a problem. And that is that it can get I use the word hacked. And you use the word bastardized. Yes. So what might happen and in the article in HBR, this is the example that they gave, someone might go in to a mechanic to get their car worked on. And then I might the mechanic, who is who has a KPI to have a high NPS. So in other words, the management of the mechanic would say, We want you to provide good customer service, which is pretty legitimate. Your mechanic might try to hack it by saying, here’s, here’s what we’ll do. If you give us a 10. On the Net Promoter Score, we’ll give you a free oil change or something like that. And so people on the front line, or will people throughout the organization, try to find ways to get high scores, so that they can hack the system. And it undermines the credibility of the system potentially.
Kevin Lawrence 08:23
And even worse, the idea is to have happy engaged customers, and then you’re gonna piss them off because the employees are hassling them to get high scores. Yeah, like it’s, and this is what the people have been said to us again, and again, never incentivize NPS scores, because if something’s incentivized creative, humans are going to find a way to make the score that make the number better. So management leaves them alone. And so I remember like I was in a car dealership, and was not why I’ve worked with them number, this is not one I worked with. And then a big poster behind the desk, showing the different scores, and what a 10 meant. And they said, We really hope you’ll give us a 10. Because in our world, with the brands that we work with, it was Nissan, whatever it was, doesn’t matter. The brands that we work with, you know, a 10 is a minimum acceptable, and if it’s not 10, there’s a problem, we need to fix it. So please let us know. Because otherwise, you know, the manager is gonna get upset with us and blah, blah, blah, blah, blah. And that’s how I get paid. My Commission’s and I really want to feed my family. And please, please give me a 10. But it’s laughable how badly so the root of it is, you’re incentivizing something that is supposed to be a natural organic source of feedback, and you end up with corrupted data and corrupted behavior. So that’s a, that’s a problem. And so and they have a solution. So we’ll get to that in a minute. And, you know, when it is managed well, though, there is a secondary problem. I mean, I’m pretty hardcore with the companies that we work with, making sure they do it right to the best of our abilities, because we want the feedback to improve and engage our customers but they’re word of it is, if you’ve got all these people who are engaged saying that they would refer you, do they. So if you’re put all this energy into super happy, engaged customers, they should stay and bring their friends. And if you put all this energy into happy, engaged employees, they should stay and bring their friends. So what they talk about in the article is, well, do you know if they bring their friends, and if they stay, and they’ve added some additional math to show if that is happening, which we’ll get into in a second? So it’s like, it’s great to have high engagement. But are you getting paid for it, basically. And that’s what MPs 3.0 is, which I think is ABS a freaking lubricant.
Brad Giles 10:45
Yeah. So what they’re doing is in the article, they talk about the founder of the concept, Fred Reichheld, saying that he had this epiphany moment where he realized that how can we make NPS better? How can we overcome all of these criticisms, we can draw on hard facts, which is accounting results. So everybody, let’s say trusts the accounting. So if we can connect it in some way to the accounting, we can actually make it better, more trusted, more reliable, and it can drive the organizational improvements that make the real difference that people actually should be doing to get better customer engagement. Meeting the customers need ultimately.
Kevin Lawrence 11:29
Yeah, so it’s simple and brilliant. And all the best solutions are simple. So NPS 3.0 is measuring the engagement side and Net Promoter Score. And the accountants will be happy on this. Did you get the growth and they call the earned growth rate? Did you get that great return you wanted on the NPS? Basically, are those happy people fueling your growth? Or do you still have to dump lots of money in sales and marketing? And so you know, the way that I really look at it is of the new business you generated, how much was earned, which is repeat customers and referrals, referred business versus how much was bought sales and marketing, where the sales and marketing people went out and chased it and brought them to you. And although it sounds very simple, most people don’t have a data, people attract new customers. And they track churn of accounts or retention of customers. But they often don’t break down this and it gives you a great number. We actually were interesting, we ran this on our firm, I was sharing with Brad, we ran this on a firm and went up as we should, in a consulting firm or coaching firm that pays so much attention to have an engaged customers, we should have a greater and greater growth rate, which we did. But our brain was like, okay, but well, maybe we can be better as it always does. So the whole again, in simple terms, it’s all of the growth, you experienced, how much came from those engaged customers staying and bringing their friends versus you going out and buying it in the market? And just because you have people that would refer doesn’t mean you’re getting the referrals.
Brad Giles 13:08
Yeah, so there’s three parts to calculate. See, it may seem a little bit complicated on the surface, but it’s actually quite simple. So we begin by calculating what’s called the net revenue retention. If you’re a software as a service business, this will be quite familiar to you. But what we do is we take this year’s revenues from customers who were also customers last year. Okay. And then we divide that by last year’s total revenues. Okay, so we’re calculating what is the revenues that we had from customers this year, and last year, and if we’ve brought on new customers, it should be different. So that’s the first bit we calculate this thing called Net Revenue retention. Second, we’re ensuring that we’re asking customers, why did you give us your business? Why have you come to us? And then within the answers, we’re dividing all of the answers into two separate buckets, let’s say the first is earned. And that is, we were referred by an existing customer would be an example of we earned that revenue, that new customer and the other side is bought. So we, they came to us through our sales and marketing efforts, pretty easy to split all of the new customers through those two areas. So that’s the second one earned or bought. And then the third one is understanding the percentage from new customers that you’ve earned through referrals. Okay, so out of all of the new customers, what is the percentage that were earned versus bought? And then that gives us what you kind of said at the beginning, which is the earned growth rate.
Kevin Lawrence 14:52
Yeah, that’s, again, it’s just a little bit of math. But are we getting an ROI on all the efforts we be put into making people really happy and engaged. And you in many organizations, once they start digging into it, I am sure they’re gonna say, Oh, well, we should probably get more referrals from our customers or employees, and they’re going to look into the systems and figure out how they can make it even easier for people to open the door for them into new opportunities. So how do you bring this to life in your company, and this is, again, it’s not rocket science. But what is awareness? This isn’t one. So we had, you know, Curtis, one of the consultants on our team, took the article, and ran the model on our firm, he went through all of our customers looked at our retention, looked at the new ones and where they came from, and calculated all the calculations. So you know, you can get a really good finance person or, you know, call Curtis, and he can run it, but it’s not rocket science, but it’s getting someone to do the math to know where you stand today. And then deciding whether you’re happy with that or not, and what you do about it. So basically starting to track it as part of your KPIs, your earned growth rate, whether it’s monthly or quarterly, you can decide. And then looking into it and getting some teams digging into it, like, how could we increase our earned growth rate with our employees, and also with our customers to different things, because in this market, people are really trying to get more referrals of employees, because it’s hard to get in hire amazing people now more than ever, but it’s always hard. But that’s not Robert, start tracking it, dig into the data and figure out what you can do to enhance it like you would with any KPI you want to improve.
Brad Giles 16:29
What I love about it is that it drives the company to build a better company, you know, where you and I always the framing of this growth whispers podcast is building enduring great companies. And this is all about building that. So what could people do to improve that earned growth rate?
Kevin Lawrence 16:57
Yes you gotta go dig into the data and see where you’re not getting it. Sometimes it’s because of retention. If you don’t have enough retention of your clients, that causes you to shrink, and a lot of companies aren’t great at that some arms or. But really, it’s brainstorming with the people who manage those client relationships. Sometimes letting them know that you have capacity, letting them know how to like, it’s just sometimes there’s something in the system that needs to be added, removed or lubricated to have it free, but depends on it. There’s I’ve seen examples of data as we started to run this, you know, some companies get a lot of referrals from their clients, but they don’t have great retention. So their earned growth rate is really low, because of the churn of the existing clients for whatever reason, it could be business model, it could be service, it could be competition, could be lots of things. And then there’s some people that are so obsessed with sales and marketing and generating new leads, that they actually don’t put any energy into earning referrals from existing clients. Again, it’s just it’s, you know, dig in and figure it out.
Brad Giles 18:03
There’s a company, this company very briefly from Perth. They’re an Internet service provider, they built the number one, the number one internet service provider in Australia, and they had the highest NPS for their market segment ISPs in the world. So they built that all on the back of NPS, every time someone would telephone their call center there, the previous NPS would pop up and the job of the call center operator was to increase that company was called III net crew. And so you know, it can if you focus on the NPS, it drives a better business outcome. It drives better engagement. And it that’s through operational mechanisms, I guess. So yeah, it can make a huge difference.
Kevin Lawrence 18:54
And another good example, we’re going to wrap up here, but another good example is software that we use called Docusign. It’s common in the world is lots of people use it. But after you sign a document, it asks you to create an account. It’s basically are that’s going to help your own growth rate, because your existing customers and that’s in these network type software’s one customer uses it and then it pings another customer sign up for it. Dropbox was like that, when they started up to a lot of these companies in software, it makes it easier to do that and leverage the network effect. And once the network starts to use it more that’s, that’s in software. It’s a whole different game and can be, and that’s why these companies can accelerate a lot faster. All right, well, let’s wrap up. So the main thing is nps 3.0. Hey, it’s great to measure engagement, buddy and getting paid for that. IE, what’s your earned growth rate on customers, our employees, right, you want to run through the three key points to think there’s a problem
Brad Giles 19:49
with NPS it can get hacked or bastardized by employees who are incentivized to get a higher score and then we don’t get a true result and it under mind to the whole thing. So instead, NPs connects that outcome to actual accounting results that everyone understands and trusts and ultimately drives the right behavior. You calculate it very briefly by understanding your net revenue retention. And that is what was the change in revenue this year? Why the second part is why people came to you, why did we get there business was earned or was it bought. And then finally, calculating the percentage of earned new customers, the new customers that we didn’t buy through sales or marketing efforts. And then finally, how to bring this to life in our company, track it, start measuring it understand the behaviors that will drive that change. Kevin gonna move to close this out.
Kevin Lawrence 20:53
It’s awesome. Wow, it was great. Just love this. We’re going to use it with lots of our clients going forward. Thanks for listening. This has been the growth whisperers podcast if you haven’t subscribed already, please hit that button. And hey, if you like it, share it with a few friends. Can you take this episode share it with your exec team share it with your leadership team that would just make a lot of sense. I’m Kevin Lawrence. You can reach us and our newsletters, also our websites and sign up to get our perspectives on a regular basis weekly. Brad Giles is at evolution partners.com.au, And Kevin’s at Lawrence and co.com. Have a great week.